What we know about MTD, New cash basis, VAT on failed venture

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The changes required to comply with reporting under making tax digital (MTD) will have a significant impact on your clients over the next five years. IN last week’s tax tips email we summarised what we know about the MTD plans, and what is still to be clarified. The Government has also announced new rules and thresholds for the cash basis, to take effect from 6 April 2017. Finally, we had a useful lesson about reclaiming VAT on business costs. It is just the cash basis point we have summarised below:

New cash basis

Reporting under MTD is going to be so much simpler if the business uses the cash basis rather than the accruals basis to draw up accounts. Hence the Government wants to widen the scope of the cash basis, and extend a version of the cash basis to landlords.

Currently any unincorporated trading business (not LLPs or property businesses) with turnover under the VAT registration threshold (£83,000) can start to use the cash basis. The business does not have to switch to the accruals basis until the turnover reaches twice the VAT threshold. This entry threshold will be increased to £150,000, and the exit threshold will increase to £300,000 from 6 April 2017.

When advising clients to use the cash basis remember that deductions for interest payments are prohibited, for amounts exceeding £500 per year. Also, there is no sideways relief or carry back of losses when using the cash basis.

The extension of the cash basis to landlords will apply by default to all unincorporated landlords from 6 April 2017, who have an annual turnover of no more than £150,000. Landlords, particularly of furnished holiday lettings, may want to opt out of the cash basis and use accruals accounting, in order to claim capital allowances. The landlord will be able to opt of the cash basis on a property by property basis.

The version of the cash basis for landlords will permit deductions for interest paid using the same rules as for individual landlords who use the accruals basis. Thus, the interest restrictions for individual landlords due to apply from April 2017 will apply equally for all individual landlords in the cash basis or not.

 

 

Time to pay, PAYE liabilities, Jointly held property

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At the end of January many people are worried about their tax bills. We have some tips on how to agree a time to pay arrangement with HMRC. If a company has failed to pay PAYE, we explain the circumstances in which that debt can be transferred to the company’s directors. Looking forward to April, we discuss how couples may want to rearrange their holding of joint property.

Below we share just part of one of the above 3 tax tips – see the side boxes on this page to learn how you could subscribe to receive the full 3 tax tips every month.

PAYE liabilities

When a company goes into liquidation leaving PAYE debts, HMRC can pursue the company directors for the unpaid tax and NIC. They do this by issuing “directions” against named directors under reg 72 of the PAYE regulations 2003 and reg 86 of the Social Security regulations 2001.

If your client is faced with such a direction, check whether these three pre-conditions for the direction have all been met:

  • The employer did not deduct PAYE
  • The failure was wilful and deliberate
  • The employee received the remuneration knowing that the employer had wilfully failed to deduct the tax.

For NIC the director has to know that the employer wilfully failed to pay the NIC, rather than just to deduct it.

Where the PAYE debt has arisen because the director’s overdrawn loan account has been discharged by the crediting of salary, the PAYE may have been calculated but not necessarily deducted, as the bookkeeping entries alone do not constitute a deduction of PAYE. This was the conclusion of the judge in the case of S West v HMRC who decided in favour of the taxpayer.

In a similar case: P Marsh & D Price, the directors were found to be personally liable for the PAYE debt as they were aware that the company did not have the funds to pay the PAYE liability. Our employment tax experts can help you assess whether your client has a good defence against a PAYE or NIC direction.

Not registered for SA, Negative earnings, New ATED rates

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There are always people who turn to you in January when they suddenly realise they need to submit a tax return for the first time. We have tips below on how to cope with those new clients. We also look at HMRC’s new guidance on negative earnings for employees, and the new ATED rates which are due to apply from 1 April 2017.

What follows is just an extract from last week’s tax tips for accountants – see more details in the side box and sign up to get your 3 timely, topical and commercial tax tips.

Not registered for SA

Every January one or two come knocking on your door (or land in your inbox) asking for help with their tax return. If the taxpayer has been issued with a tax return (or notice to submit one) and has a UTR number, you should be able to help him submit the return online.

However, where the taxpayer hasn’t registered with HMRC and doesn’t have a UTR number, his tax return can’t be filed online. It is now too late to apply for a UTR number to activate it by 31 January.

The errant taxpayer should have notified HMRC by 5 October 2016 that he needed to submit a tax return for 2015/16. HMRC can issue a penalty for late notification, but that penalty is tax-geared. If the taxpayer pays all the tax due for 2015/16 by 31 January 2017, no penalty is due. Also, if all the tax is paid within 12 months of the due date, any late notification penalty should be reduced to nil, if a full disclosure has been made without prompting from HMRC.

The problem is; how pay this tax and make the full disclosure if the online route is blocked. You can submit a paper tax return. Where the taxpayer hasn’t been issued with an SA return or notice to submit a return, a late filing penalty can’t apply.

The tax return submitted must include the taxpayer’s NI number, and be accompanied by a form SA1 to register for self-assessment. If the taxpayer has started a new self-employment, form CWF1 should be completed, but you can do this online, you don’t need the UTR number for that form.

The tax can’t be paid online without a UTR, but it can be paid by cheque posted to: HMRC, Direct, BX5 5BD. Write the taxpayer’s NI number on the back of the cheque and include a specific HMRC payslip, created using the link below. Allow at least three days for the cheque to arrive, and get a proof of posting certificate from the Post Office.

You may have to chase HMRC by phone to get the tax allocated to the right account, but that can wait until February.

Missing child benefit, Missing interest, Payments on account

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When rushing to complete the last few tax returns, it is tempting to skip that vital stage of thinking what could be missing. Two examples of missing items are: child benefit, and interest paid as part of a PPI settlement. We explained the implications of such omissions in last week’s tax tips email. We also had news of a fault in HMRC’s computer system which affects reductions in payments on account for 2016/17.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device).

Missing interest

Three years ago we advised you about the taxation of settlements of payment protection insurance (PPI) claims – see our newsletter on 13 February 2014. Many thousands of people received such payments, and most believed that the entire payment was tax free, so it would have no effect on their tax liability.

In reality the settlement will have included interest calculated at 8% on the PPI premiums refunded. That interest is taxable, and some banks deducted basic rate tax, but other lenders did not, see examples in HMRC’s savings and investment manual. In either case the interest portion of the PPI settlement should be declared on the taxpayer’s return for the year in which it was received.

HMRC have now woken up to the fact that many taxpayers forgot about the PPI interest when completing tax returns, so they have written to around 10,000 individuals asking them to check the interest entries on their 2014/15 returns. You won’t have received a copy of this letter, as it was not copied to tax agents, even where an agent was appointed to act.

A statement from HMRC said the letters were targeted using information from banks, financial institutions, third party intermediaries and social lenders. However, this data could only be matched to taxpayers using names and addresses, as NI numbers were not recorded by the interest payers. It is possible that some of the letters will have been mis-directed.

HMRC’s letter does not mention PPI, so it may fail to jog the memory of the recipient. If your client has received such a letter, certainly double check whether their regular bank interest was correctly recorded, but also ask them about any PPI settlement they may have received.

The 2014/15 SA tax return can be amended online until 31 January 2017. Corrections for earlier years will have to be notified to HMRC by letter.

 

CGT on overseas properties, Paying PAYE, NMW traps

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As you finalise the last of the SA tax returns for 2015/16, pay close attention to any capital gains relating to overseas property. The correct computation of such gains is not obvious, as we explain below. We also have tips for paying PAYE, and a warning for employers concerning the next scheduled increase in the national minimum wage.

What follows is an extract from last week’s tax tips email for general practitioner accountants – see side box for more info.

CGT on overseas properties

Calculating the CGT due on the disposal of a property is not easy; you need to know which expenses can be deducted, and if any tax reliefs are due. If the property was located overseas, the computation is complicated by the fact that the consideration, and possibly the purchase, are likely to have been made in a foreign currency.

If your client has sold an overseas property you should check that the gain has been calculated in line with HMRC guidance and case law, as any deviation from the approved method will leave the taxpayer open to penalties for errors.

Mr & Mrs Knight calculated the gain on the disposal of their property in Switzerland in Swiss francs, and translated the resulting gain into sterling at the exchange rate applicable on the date of disposal. This appeared logical, as they purchased the property in 1988 in Swiss francs, and sold it in 2010 for consideration received in Swiss francs.

However, it was established in Capcount Trading v Evans [1993], that the correct way to calculate such a gain is to translate each item in the computation into sterling at the date the transaction occurred. For the Knights this meant restating the purchase price in sterling using the appropriate exchange rate in 1988, and restating the consideration in sterling at the date of disposal in 2010. The difference between those figures, less any allowable expenses (also expressed in sterling), is the assessable gain for UK tax purposes.

This method of calculation pulls in any part of the gain which is solely related to the movement in the exchange rates, and makes that exchange-gain also subject to CGT. This may appear unfair, but that is how the computation must be done.

Whenever a client disposes of an overseas property, you also should check that any income received from letting the property has been correctly declared on their earlier tax returns. This is the first question HMRC will ask when they see the gain from the property disposal reported.

Inaccuracy penalties, Scottish tax bands, The Santa clause

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Even in the middle of the SA tax return season, HMRC continue to issue penalties for errors in past returns. In many cases those penalties can be suspended, and we have some tips to help you achieve the best outcome for your client. We also explain how the Scottish income tax bands for 2017/18 will work. Finally, in case you have not completed your Christmas shopping, we have a reminder of the “Santa clause” regarding tax-free gift vouchers for employees.

What follows is an extract from our weekly tax tips as explained in the box at the side (or below if you’re viewing this on a mobile device)

The Santa clause

If your clients are feeling generous towards their employees this Christmas, you can advise them to provide each employee with a gift voucher worth up to £50. These vouchers are tax and NI free, if certain conditions are met, and a company can even give tax-free vouchers to its directors.

This tax-free gift possible due to the new statutory exemption for trivial benefits, which applies from 6 April 2016 (see page 4 of Employer Bulletin). The vouchers must not be exchangeable for cash, so if the shop allows the customer to receive change in cash when using the voucher, it doesn’t qualify as a tax-free trivial benefit.

Also, the gift vouchers (or other non-cash benefit) must not be given as reward for services. So the employer can’t say to his staff; “If you finish all the orders by 24 December I’ll give you each a voucher”. He has to surprise them with the gifts, but he doesn’t have to give the same amount to everyone in order to make it tax-free.

The company can also be generous to its management, but the directors and their families can only receive up to £300 of tax-free trivial benefits per tax year. There is no limit to the number of tax-free vouchers an employer can give to other staff members, as long as each gift is not worth more than £50.

Property businesses, Selling a home, Pay class 2 NIC early

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The British are often said to be obsessed with the value of their homes. Last week we examined two ways in which the government is seeking to extract the maximum amount of tax on that value on the disposal of UK properties. We also explained why it may benefit your clients to pay their class 2 NIC in December rather than in January.

What follows is just an extract from last week’s tax tips sent out to all subscribers on Thursday morning. Please also note the caveats in the box on the right.

Pay class 2 NIC early

Paying Class 2 NIC allows the individual to qualify for certain contribution-based state benefits including; state retirement pension, maternity allowance, employment support allowance (ESA) and job seekers allowance (JSA). Note there are non-contribution versions of JSA and ESA.

To be eligible to receive the benefit the taxpayer must have paid sufficient class 2 NIC for a specified period, which differs for each benefit. For ESA and JSA the claimant must have paid at least 50 weeks of NIC for both of last two tax years which ended before the beginning of the benefit year. The DWP benefit year starts on the first Sunday in January, not on 6 April, as you might expect.

If the taxpayer pays all his class 2 NIC for the 2015/16 in January 2017 (due date is 31 January 2017), he won’t have paid those contributions before the start of the benefit year which starts on 1 January 2017. This means he will have paid insufficient class 2 NIC for the tax year 2015/16, and won’t qualify for the contribution based ESA or JSA for in 2017. The claimant may have to apply for income-based JSA instead.

Child benefit and pensions, ATED and developers, Class 2 NIC mismatches

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As an accountant you will be practised at pointing out tax traps to your clients, and helping them out of the holes they have fallen into. Last week we highlighted two tax traps; for parents who haven’t claimed child benefit, and property developers who haven’t claimed ATED relief. We also explained how mismatches between class 2 NIC and self-assessment occur, and how to resolve them.

What follows is an extract of just one of the 3 tax tips we shared with general practice accountant subscribers last week. Further details are in a box on the right.

Class 2 NIC mismatches

When the collection of class 2 NIC was transferred to the income tax SA system for 2015/16 onwards, most advisers assumed that the calculation of the class 2 liability would also be generated by the data included on the SA return. This is not the case.

HMRC continues to run two separate computer systems; SA for income taxreturns, and the NPS which contains class 2 NIC records. The liability for class 2 NIC is based on the NPS record, not on the information from SA returns.

Entries on the SA return do not update the taxpayer’s NPS record. Recording a commencement or cessation date for a self-employment on the SA return will not affect the liability for class 2 NIC. HMRC must be separately informed of that information.

However, data from the NPS is used to overwrite data from the SA return. For example, when the direct debit mechanism for paying class 2 NIC stopped in mid-2015, the taxpayer may have cancelled their direct debit. The NPS computer interpreted this as a cessation of self-employment, and transmitted this information to the SA computer. As a result the taxpayer has no class 2 NIC collected as part of his SA liability for 2015/16, although it continues to be due.

Check that your self-employed client has a class 2 NIC liability for 2015/16. Non-payment of class 2 NIC may affect the taxpayer’s eligibility for a state pension.

VAT flat rate scheme, Pensions recycling, Employee shareholder scheme

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The Autumn Statement included three announcements which may have an almost immediate impact on your clients. You need to talk to all those clients who use the VAT flat rate scheme, as changes from 1 April 2017 may make it uneconomic to use. Individuals who have drawn some pension benefits, but who are still employed, could be caught out by changes to the pensions recycling rules. Investors who are planning to use the Employee Shareholder Scheme need to be aware that the rules have changed from today.

What follows is an extract of just one of the 3 tax tips we shared with general practice accountant subscribers last week. Further details are in a box on the right.

Employee shareholder scheme

Under the employee shareholder scheme (ESS) employees can receive shares in their employing company if they sign an employee shareholder agreement under which they surrender a set of statutory employment rights, including redundancy pay. The employee receives up to £2000 worth of shares free of tax and NIC, and the company can claim a tax deduction for the cost of supplying those shares.

When the taxpayer disposes of his ESS shares the first £100,000 of gains are exempt from CGT. If the ESS shares were awarded under an employee shareholder agreement signed before 16 March 2016, the CGT exemption was restricted to £50,000 of ESS shares, as valued on acquisition. This effectively gave an unlimited CGT exemption on disposal of the shares, as £50,000 was a huge amount of ESS shares to acquire.

There has been no restriction on who could receive the ESS shares; the shares could be awarded to existing shareholders, even those who hold a material interest in the company. So rather than being a way to incentivise ordinary employees, the ESS has been used by equity investors to award themselves tax-free shares in fast growing companies. Those investors are not concerned with surrendering their employment rights, as they generally have control of the company they invest in.

The Government has finally realised that the ESS has not been used for the purpose it was intended. It has removed the income tax, NIC and CGT reliefs for employees, but only in respect of ESS shares awarded under employee shareholder agreements entered into on or after 1 December 2016. Where the employee had already taken advice regarding the employee shareholder agreement before 1.30pm on 23 November 2016, that agreement can go ahead with the tax relief in place if it is signed by 2 December 2016.

The corporation tax deduction for the employing company remains in place. Also the CGT exemption for ESS shares already issued remains.

Misleading gov.uk, Class 2 NIC back payments, Employment allowance

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Oxford Dictionaries has declared the 2016 word of the year to be: ‘post-truth’. Bear this in mind when searching for information on gov.uk, or advising clients about what they may have read. Our tax tips this week include a number of ‘post-truth’ examples from gov.uk that could impact advice you give clients. We also have tips on how to deal with a deficiency in class 2 NIC, and some practical advice for claiming the employment allowance.

As usual we have summarised below one of the 3 tax tips we shared by email with our general practice accountant subscribers last week. Further details are in a box on the right.

Class 2 NIC back payments

From 2015/16 onwards the self-employed are due to pay class 2 NIC alongside their self-assessment. This has caused all sorts of problems with the HMRC computer.

The correct amount of class 2 NIC for 2015/16 is normally £145.60 (52 x £2.80), but in some cases the computer thinks it should be £179.40 (52 x £3.45) which is the special rate for share fishermen.

Occasionally the tax computation includes a nil liability for class 2 NIC, although the self-employed profits exceed the small profits threshold of £5,965. When questioned HMRC say the taxpayer hasn’t been registered for class 2 NIC. Where the taxpayer can prove he has paid class 2 NIC for earlier years, the HMRC position should be challenged without delay. If HMRC’s record of class 2 NIC payments for the taxpayer is incorrect he will not receive the level of state pension he is expecting.

There are taxpayers who haven’t paid class 2 NIC for many years, as the underpayment was never chased up, or they didn’t realise they had to pay class 2 and class 4 NIC. For those cases the taxpayer should be advised to pay the class 2 NIC due for as many years as HMRC will accept. This will be a minimum of six years, and the payment will generally need to be paid by 6 April 2017, but the deadline may be longer if the taxpayer is close to retirement age.

If the taxpayer has decades of unpaid class 2 NIC, look at the case of Richard Thomas. He won the right to pay voluntary class 2 NIC back to 1976 as he had been badly advised, and HMRC had not chased for payment.